Market chatter has been dominated this week by emerging market under-performance. There has been a tremendous amount of pain in EM equities, particularly in Asia. It appears as if the fears are spreading throughout EM markets independent of secular catalysts (see KOSPI down nearly 5% since Mondays high). The EM growth story has been a favorite of nearly everyone since coming out of the financial crisis, which leads participants to question whether or not to fade this recent EM weakness. No doubt the global picture has become more complicated given the revival of developed markets. Bernanke testified before Congress yesterday, attempting to alleviate inflationary concerns from the GOP regarding QE2. While it is rather easy to make politicians look stupid (they always seem to find a way during Q&A, see Maxine Waters), commodity and fixed income markets are indeed fueling concern of unchecked inflationary pressures (USTs have sold off significantly, led by the long end). Advocates of both US recovery and US inflation concern camps alike cite the dramatic steepening as evidence for their positions. Outside the EM under-performance storyline, the global picture has remained interesting as well.
The Egyptian political scene appears to be coming together in the immediate time frame. NBC News is reporting today that Mubarak will step down today; the report has been disputed and more recent headlines make it appear that a military coup may potentially be in the works with VP Omar Suleiman looking to be his interim replacement. There is a great deal of misdirection in the coverage of the Egyptian situation, as international journalists are being pressured and intimidated by governing authorities. Europe has remained steady relatively speaking, although a poor 5y auction out of Portugal yesterday has renewed concerns regarding a bailout; spreads widened significantly overnight and the ECB has had to step in to buy Portuguese debt. Despite this recent turn, EURUSD has traded within the 1.35-1.375 range over the past few weeks; I remain of the opinion that a move above 1.40 would be welcomed by no one, but the cross has been shaking off any recent negative headlines with relative ease, making a move down just as difficult. When news spread this week that German CB head hawk Axel Weber would not be a candidate to replace current ECB chief JC Trichet, many participants expected the event to be Euro negative, a response that never came and was ultimately explained away.
The markets themselves have been more of the same up until today: stocks higher, bonds lower, and currencies trading fairly choppy. However, USD has rallied significantly across the board in the last day, responding to EM equity fears and rising US yields. Reversal patterns appear in several charts such as AUDUSD and EURUSD and USD may have broken out to the upside against other safe haven currencies CHF and JPY. It looks like the trade weighted USD index has put in a potential head and shoulders reversal pattern; if it can hold a break above 78.35, the pattern implies a move to 79.85. It should also be noted that the massive insider trading case has made progress over the past week, as four hedge fund traders, including the first name directly linked to SAC Capital, were charged.
On a lighter note, Wikileaks Julian Assange finally admitted that he has no idea regarding the significance of the data on the Bank of America hard drive he has, after months of monumental hype.
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Editorial Staff
